MONTREAL - Competition in the Southern Gas
Corridor from the Caspian Sea basin to Europe
continues to heat up, with more details about the
Trans-Anatolian gas pipeline emerging and Russia's
Prime Minister Vladimir Putin bringing forward
construction of the South Stream pipeline under
the Black Sea.

Putin ordered construction
of the Russian-Turkey-Europe South Stream pipeline
to start by the end of 2012 instead of in 2013 as
previously planned, despite having no identified
sources for gas and no commitments for purchases.

The Trans-Anatolian pipeline (TAGP), which
will run from Turkey's

eastern to its western border,
is also referred to as "Trans-Anadolu" and
sometimes by its acronym in Turkish TANAP.
Azerbaijan's energy minister, Natik Aliev, and his
Turkish counterpart, Taner Yildiz, last week
signed the Memorandum of Understanding (MoU) for
TAGP construction, fixing its "initial" volume at
16 billion cubic meters per year (bcm/y). The
agreement also established that the State Oil
Company of the Azerbaijani Republic (SOCAR) will
build the pipeline with the two Turkish state
firms - BOTAS and TPAO.

Reports indicate
that the TAGP will be 80% owned by SOCAR, enough
to permit the Azerbaijani state firm to negotiate
advantageously with major foreign energy companies
wishing to use the pipeline, by offering them a
significant minority share of ownership while
still retaining a majority stake for itself.

Yildiz has said separately that SOCAR will
establish the construction cost and hinted at a
figure around US$5 billion; other figures in the
press range up to from $7 billion to $9 billion.
This range will be better defined as feasibility
studies proceed and the planning process develops.

While the TAGP has symbolically been
started already, real construction is scheduled to
begin in 2012 and finish by 2017, when the gas
from the offshore Shah Deniz Two deposit is
scheduled to be available for shipment and sale to
foreign customers. Shah Deniz Two is estimated to
hold 1.2 trillion cubic meters of gas. Of the 16
bcm/y that it will start producing in 2017, 10
bcm/y is destined for consumption in Europe and
the remainder for Turkey either to consume or sell
onwards.

It is significant that the TAGP's
partners now refer to the 16 bcm/y figure as the
pipeline's "initial" volume. This indicates the
intention that other pipeline projects should be
integrated with it, rather than the TAGP with
them. Thus Stefan Judisch, who heads the supply
and trading unit of Nabucco's German co-principal
RWE, told Bloomberg News that TAGP construction
"raises questions about access and financing" even
as it would lower Nabucco's investment costs and
shorten it. According to Judisch, banks might
require a "pre-completion guarantee" in order to
be assured that "gas actually flows".

Judisch also indicated that the TAGP's
entry into the pipeline competition field could
complicate negotiations with other potential
Southern Gas Corridor suppliers. Without naming
them, he clearly intended to indicate Iraq and
Turkmenistan, which could require guaranteed
access to the pipeline system and upon whose
participation (or at least one of them) depends
the realization of the Nabucco's full 31 bcm/y
planned throughput.

Meanwhile, in the
attempt to steal a march on Nabucco, construction
of which is scheduled to begin in 2013, Putin has
ordered that the symbolic start to construction on
South Stream be moved ahead to the end of this
year. This follows the conclusion, at the end of
December, of an agreement with the Turkish
government for construction to proceed. The leader
of the Turkish opposition Republican People's
Party (CHP), Kemal Kldarolu, has criticized the
government, alleging that the deal is a special
favor to industrial circles close to the ruling
party.

Speaking with the Turkish media at
an end-of-the-year review of political and
economic developments, Kldarolu said the deal
"contradicts Ankara's interests and will destroy
the country's plans to become a regional energy
hub". Earlier in 2011, Ankara had informed Russia
that it would cease to take 6.6 bcm/y from Gazprom
through the Blue Stream natural gas pipeline
(Russia to Turkey under the Black Sea). Gazprom
announced its readiness to sell directly to
Turkish industrial companies but found no takers
for its offer.

Now Gazprom has reduced its
prices at the same time when the Turkish
government has given its approval for the South
Stream pipeline to be constructed through in the
waters of its exclusive economic zone (EEZ).
Kldarolu points out that the price reduction will
be valid for only a limited time while the South
Stream would have long-term effects not only on
the economic but also on the geo-strategic level,
while increasing the country's dependence on gas
from Russia.

Notwithstanding this
bilateral agreement permitting construction
through the EEZ and Putin's wish to accelerate the
pipe-laying plan, it is far from a sure thing that
South Stream will be built. Not only is the final
route of the pipeline undefined, but it is not
even clear which country it would make landfall at
on the western Black Sea coast.

Nor are
even the outlines of its putative route westward
from there set out programmatically. Gazprom head
Aleksandr Medvedev continued to be intentionally
vague on this matter when speaking to the press at
the signing ceremony. Such a decision, he said,
would be taken only at the time of a future final
investment decision.

Originally a project
of Russian gas giant Gazprom, South Stream has
been pushed by the Russian government as it has
sought to increase its lobbying weight in Brussels
by co-opting first the Italian firm Eni (which
cooperated in laying the Blue Stream pipeline on
the Black Sea floor a dozen years ago), then the
French firm EdF and the German BASF.

The
project is a bargaining chip not only against the
TCGP but also against Ukraine's pipeline
transmission system. Russia and the EU are seeking
to reach a financial understanding to cooperate in
the reconstruction of this system at the same time
as Russia and Ukraine are bilaterally negotiating
terms for future delivery of gas to Ukraine, with
price as a huge sticking point.

According
to a report by the independent agency Ukrainian
News, Mykola Tomenko, the deputy chairman of
Ukraine's Verkhovna Rada, has stated that Russia
demands the privatization of the Ukrainian gas
transportation system and the Naftohaz Ukrainy
national oil and gas company. Such privatization
is currently banned by a parliamentary act having
the force of a constitutional amendment.

Gazprom's Medvedev has publicly challenged
the valuation placed by Ukraine on its pipeline
and energy transmission system. Over the past
10-15 years, Russian energy companies have taken
control of energy infrastructure in other Soviet
successor states by offering to forgive energy
debts in return for expropriation of the physical
plant. It appears that Russia has never taken its
eyes off Ukraine's.

Dr Robert M
Cutler (http://www.robertcutler.org),
educated at the Massachusetts Institute of
Technology and The University of Michigan, has
researched and taught at universities in the
United States, Canada, France, Switzerland, and
Russia. Now senior research fellow in the
Institute of European, Russian and Eurasian
Studies, Carleton University, Canada, he also
consults privately in a variety of fields.